Solana Foundation Unveils PropAMM To Deliver Centralized-Grade Liquidity Fully On-Chain

Solana Foundation, a non-profit organization focused on advancing decentralization, adoption, and security across the Solana blockchain, has unveiled its latest innovation: a proprietary automated market maker (PropAMM) mechanism. It aims to address long-standing inefficiencies in on-chain market making by adapting traditional trading concepts to the unique constraints of blockchain networks.

According to the Solana Foundation, in conventional markets, market makers continuously adjust their prices to stay ahead of informed traders. On centralized exchanges, such as Binance, a drop in Bitcoin’s price prompts market makers to cancel existing orders and submit new ones at updated levels, protecting themselves from traders who act on early information. Market makers profit from the spread between buy and sell orders, but when informed participants enter the market, they risk being “picked off” by executing trades at outdated prices, which can result in significant losses. Avoiding this scenario requires constant adjustment of bids and asks, a process that is straightforward on fee-free centralized platforms.

On-chain, however, traditional market-making techniques become costly. Each order placement, cancellation, or update incurs a transaction fee, even on Solana where costs are minimal. These fees, combined with the highly skewed distribution of market-making profits, render conventional order book strategies largely unprofitable in decentralized environments.

Automated market makers (AMMs) like Uniswap v1 and v2 addressed this problem by eliminating orders entirely. These systems automatically adjust prices based on liquidity ratios, allowing market participants to trade without requiring constant order updates. While this approach solved transaction fee issues for liquidity providers (LPs), it introduced a vulnerability: prices can lag behind broader markets, exposing LPs to losses from arbitrageurs who exploit discrepancies.

Uniswap v3 improved capital efficiency through concentrated liquidity, letting providers allocate funds within specific price ranges rather than across an entire curve. Yet, this method still relies on external arbitrage to maintain price alignment, meaning liquidity providers remain susceptible to informed traders unless they actively reposition their capital.

The new PropAMM mechanism from Solana aims to tackle these persistent challenges by creating a more responsive, on-chain market-making system that balances capital efficiency with protection against informed trading, potentially redefining how liquidity is provided and maintained on decentralized platforms.

PropAMM Innovation Brings Centralized-Grade Liquidity And Real-Time Pricing To On-Chain Markets

This mechanism introduces a new approach to on-chain liquidity by integrating real-time, predictive price feeds. Unlike traditional automated market makers that rely on trades to adjust prices, PropAMMs maintain an off-chain model to forecast asset prices and transmit updated market values on-chain. This enables them to actively manage liquidity in a manner comparable to order books, while avoiding the computational and transaction costs associated with repeatedly replacing multiple orders.

A PropAMM operates through a smart contract on Solana that holds assets, such as Bitcoin and USDC, and executes trades based on a set of dynamic conditions. The contract evaluates factors including the current market price, asset volatility, trade history, and the source of incoming trades. Using this information, it provides immediate quotes to buyers and sellers. For example, if Bitcoin is priced at $100,000, the contract might offer to buy at $99,999.99 and sell at $100,000.01, adjusting instantly if the market price shifts to $98,000.

This reduces on-chain overhead. Updating a single price requires minimal data, whereas traditional order-book strategies demand multiple updates, cancellations, and insertions, each incurring additional computation and storage costs. PropAMMs leverage Solana’s computational capabilities to process sophisticated logic using minimal inputs, allowing liquidity to be expressed programmatically rather than restricted to fixed prices or sizes.

By embedding the market-making strategy directly into smart contracts and publishing market prices on-chain, PropAMMs achieve levels of depth and tight quoting previously only attainable on centralized exchanges. This innovation enables decentralized platforms to offer highly competitive liquidity while maintaining efficiency, transparency, and full on-chain execution.

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